S&P 500 Set For Best Month Of 2023 As Market Gives Thanks To Strong Earnings, More Forgiving Fed

Topline

Major stock indexes are on pace to post one of their best months of the last decade, with a strong batch of quarterly earnings and economic data helping to satiate investors.

Key Facts

The S&P 500 is up 9% in November, while the Dow Jones Industrial Average and the tech-heavy Nasdaq are up 6% and 11%, respectively, with each index gaining modestly Wednesday.

That’s the S&P’s biggest monthly gain since July 2022 and the index’s fourth-best month of the last 10 years.

The banner returns came as corporations reported strong profit growth and evidence about potentially loosening financial conditions helped drive optimism about further equity expansion.

More than 80% of S&P companies’ third-quarter earnings beat analyst expectations, the highest rate in two years, according to LSEG data.

This month, the market also increasingly priced in the belief that the Federal Reserve is done hiking interest rates after core inflation and labor market growth both came in at more than two-year lows, a welcome development for bottom lines crushed by pricier debt financing.

The still-battered bond market has also enjoyed some relief in November, as 10-year U.S. Treasury yields have fallen 50 basis points to below 4.4%, a two-month low.

Key Background

Both the stock and bond markets will be closed Thursday for the Thanksgiving holiday and close early Friday. The fourth quarter historically brings the strongest returns for stocks, a phenomenon some merry observers chalk up to a “Santa Claus rally.” Cheer has been abundant all of 2023 for long investors, as the S&P is up nearly 20%, wiping out much of last year’s brutal losses. Driving much of the gains have been mega-cap tech stocks, such as Apple, Microsoft and Nvidia, each of which hit all-time high share prices this year.

Crucial Quote

Third quarter results “knocked us out of the earnings recession” but the “resulting food coma” could affect the market’s expectations moving forward, Commonwealth Financial Network strategist Rob Swanke wrote Tuesday. The S&P’s higher-than-normal relative valuation “may be a case of the market’s eyes being too big for its stomach, but for now, I’m going to enjoy my pie,” Swanke added.

What To Watch For

If stocks can ride recent momentum to new highs. Goldman Sachs, Morgan Stanley, UBS and Wells Fargo strategists all project the S&P to rise modestly by the end of 2024, while Bank of America forecasts the index to sit at 5,000 next year, higher than the prior peak of 4,796.

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